The management team at PSSS is looking toward the future. They want to maintain a gross profit margin of 50%. If the estimate for net sales in 2016 is $5 million, how much gross profit will be necessary for 2016 to maintain this ratio?
Gross Profit Margin:
The gross profit is the company's trading profit that represents the difference between the sales revenue and the cost of goods sold. Gross profit is the profit before considering the operating and nonoperating expenses. To compute the gross profit margin, gross profit has to be divided by the net sales of the period.
Answer and Explanation:
The gross profit that will be necessary to maintain a gross profit margin of 50% in 2016 is $2,500,000.
The management of PSSS has provided the following data:
- Target gross profit margin for 2016 = 50%
- Estimated sales for 2016 = $5,000,000
- Gross profit margin = Gross profit / Sales
- Gross profit = Gross profit margin * Sales
- Gross profit = 50% * $5,000,000
- Gross profit = $2,500,000
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 17